Thank You

Error.

Bruce Geller, a trim, intense value investor, steers New York-based Dalton Greiner Hartman Maher. The firm began life in 1982 as Dillon Read Capital. Eight years later, the four eponymous partners carved it out from Dillon Read. Geller joined them soon after, soaking up the DNA that underlies Dalton Greiner's brand of value investing. The investment outfit's 10-person team, led by capital-goods and retail expert Geller, 42, has produced some healthy long-term returns for its mutual and hedge funds and separate accounts. In the 10 years through June, its benchmark all-cap value strategy was up 8.2% annually, handily outstripping the Russell 3000. Geller says the current nervousness about the market and macroeconomic conditions obscures a "manufacturing renaissance" in the United States and the promising prospects for a host of stocks.

"Even if contagion from Europe and China causes a slowdown, that won't send us into recession." -- Bruce Geller
Peter Murphy

A prototype is
3MMMM -0.15174506828528073%3M Co.U.S.: NYSEUSD151.34
-0.23-0.15174506828528073%
/Date(1438376623386-0500)/
Volume (Delayed 15m)
:
1536236AFTER HOURSUSD151.887
0.5470.36143782212237346%
Volume (Delayed 15m)
:
83386
P/E Ratio
19.757180156657963Market Cap
94548905273.1507
Dividend Yield
2.7091317563102946% Rev. per Employee
346548More quote details and news »MMMinYour ValueYour ChangeShort position
[MMM], the premier global industrial manufacturing company. It's not the cheapest stock, but has well-above-average profitability and a consistent long-term record. It generates significant free cash flow every year, and management utilizes this for attractive acquisitions and dividend payments. Because of this tradeoff, we are able to own some of the great global franchises. It's a time-tested approach. We've been in business for three decades. It doesn't work every time, of course: Some markets are more deep-value-driven.

What kind is this one?

Over the first quarter, deeper value did better. You saw a reversal in the second quarter as fears about Europe came to the forefront. The year has been a flip-flop. Today, there is more pessimism, and people are positioned more defensively. It's not necessarily fundamentals driving the market every day: One line out of Europe that they won't let the euro collapse and the market is up 200 points. And as a fundamental value shop, we spend the bulk of our time focused on industrial fundamentals. We are not macro investors, in any sense.

So how does one invest when governments are so intrusive?

Our advantage is on the stock-picking side: We are willing to take a longer-term view. 3M is a great company to tuck away and own. We've owned it for six years and unless the fundamentals break down or the stock gets too expensive, it is a core position. Today, I see so much performance anxiety among investors, their constituents, the consultants, the clients. It forces people to be more short-term-focused. That opens up opportunities to own great businesses for the long term that are not appreciated enough today.

What's your view for the market?

The economy has slowed somewhat, but we are not bears. End markets are nowhere near the 2007 prior peak; a lot are not even back to a normalized trend line. Housing is a great example. Automotive and a lot of industrials are at midcycles. So even if contagion from Europe and China causes a slowdown, that won't send us into recession, and if it does, it will be relatively shallow and short-lived.

The fiscal cliff and the election are so hard to gauge. As a firm, we have no edge predicting what happens. Politicians are said to make the right decision only after they exhaust all alternatives. I believe compromises will be made at the 11th hour to avoid the fiscal cliff. Worst case is a dramatic contraction in gross domestic product, which is not in anyone's best interest.

We also see the U.S. economy doing better than Europe's and China's. Our chairman, Tim Dalton, recently wrote about the manufacturing renaissance. Over the past decade, U.S. manufacturing labor costs have become much more competitive. We have improved our cost structure much more than the rest of the world has. Lower unit labor costs are partly driven by above-average productivity, greater use of technology, and outsourcing of lower-cost, labor-intensive jobs to the Far East, one of the reasons employment has been sluggish. Then you have the very cheap natural gas that the U.S. has an abundance of right now, which really helps competitiveness, particularly in the materials sector, where our companies have access to $2 to $3 [per million British thermal units] natural gas; other companies in the world pay significantly more. Also, the dollar has been declining over the same period. Put it all together, and our all-in costs are quite a bit lower and much more competitive than they were a decade ago. It is one of the reasons many companies, even in a world of slow growth, are reporting record earnings and high margins that we think are sustainable.

There are definitely some risks that our economy slows but that, frankly, is priced in. Valuations are reasonable and below historical averages: More pessimism than optimism is built in. Free-cash-flow yields are pretty much at highs over the past 50 years. The U.S. Treasury market has quite a bit more risk than people perceive: You are losing purchasing power on your money. The Bank Credit Analyst reports that when bond yields are between 1% and 2%—and real yields are even lower, factoring in inflation—10-year Treasuries give you a negative return over five years. The flip side is, if you can buy stocks at a normalized P/E around the 14 level, the subsequent five-year return is in the double digits.

I didn't want to get greedy. We did well, shorted it at $40 after CEO Ron Johnson gave his big coming-out speech. I was surprised at the way the sell side took some simple assumptions, built them back into models, and came out with egregious earnings estimates. Same-store sales fell 19% in the first quarter. The current quarter could be even worse. There will be a lot of growing pains, and they have a leveraged balanced sheet.

The real death blow would come if there is a big pushback from vendors. Part of the strategy is attracting exciting new vendors to reinvigorate the stores. Some, spooked by seeing how badly sales have fallen, are asking: "Is this really a thriving department store we want our brand to be part of?" The big risk is if the brands start balking and dictating the terms. The reason I covered is that Penney is now unveiling new brands in its stores, and there's a lot of excitement and buzz. The news flow is positively biased. That said, they report earnings in a week. I will sit on the sidelines and watch the action.

What do you like in retail?

Chico's FASCHS -0.13123359580052493%Chico's Fas Inc.U.S.: NYSEUSD15.22
-0.02-0.13123359580052493%
/Date(1438376493729-0500)/
Volume (Delayed 15m)
:
1032104AFTER HOURSUSD15.22
%
Volume (Delayed 15m)
:
46570
P/E Ratio
36.23809523809524Market Cap
2181863073.25306
Dividend Yield
2.0367936925098555% Rev. per Employee
112897More quote details and news »CHSinYour ValueYour ChangeShort position
[CHS]. The company has four concepts: First is Chico's, which targets shoppers with above-average income—baby-boomer, fashion-conscious females. It is gaining share from department stores and from weaker players. Second is White House Black Market, a younger working-woman demographic, in which the clothing was originally only white and black, but now includes some colors. Store growth is strong. Third is Soma Intimates, which targets the Chico's customer who may not be comfortable shopping at Victoria's Secret, but doesn't want to buy at a department store. Soma has a great niche. Recently, Chico's bought an e-commerce platform called Boston Proper, with trendy clothes for working women of moderate-to-above-average income. That's rapidly growing. It further makes the company a multichannel retailer. The e-commerce division of the other three concepts is 10% of sales; Boston Proper, a pure e-commerce company, increases their overall exposure. And they're looking at rolling out Boston Proper stores.

It all creates multichannel opportunities. And multiple concepts give them buying power with landlords. Chico's right now has about 1,100 stores. With the four concepts, they can probably come close to doubling their store base. A lot of retailers in the value space tend to be more mature and saturated, like
Ann Inc. ANN 0.37297060114085123%Ann Inc.U.S.: NYSEUSD45.75
0.170.37297060114085123%
/Date(1438376476654-0500)/
Volume (Delayed 15m)
:
335981AFTER HOURSUSD45.75
%
Volume (Delayed 15m)
:
8069
P/E Ratio
27.727272727272727Market Cap
2107931284.90448
Dividend Yield
N/ARev. per Employee
135138More quote details and news »ANNinYour ValueYour ChangeShort position
[ANN] or
Aeropostale ARO 5.594405594405594%Aeropostale Inc.U.S.: NYSEUSD1.51
0.085.594405594405594%
/Date(1438376749447-0500)/
Volume (Delayed 15m)
:
1493686AFTER HOURSUSD1.4186
-0.0914-6.052980132450331%
Volume (Delayed 15m)
:
40700
P/E Ratio
N/AMarket Cap
120066139.149532
Dividend Yield
N/ARev. per Employee
83850.5More quote details and news »AROinYour ValueYour ChangeShort position
[ARO] or
Abercrombie & Fitch ANF 0.9547738693467337%Abercrombie & Fitch Co.U.S.: NYSEUSD20.09
0.190.9547738693467337%
/Date(1438376439810-0500)/
Volume (Delayed 15m)
:
1379101AFTER HOURSUSD20.09
%
Volume (Delayed 15m)
:
34718
P/E Ratio
143.5Market Cap
1397641225.52017
Dividend Yield
3.982080637132902% Rev. per Employee
55861.9More quote details and news »ANFinYour ValueYour ChangeShort position
[ANF]. I am forecasting double-digit earnings growth. If you can get top-line growth of around 10%, and 6%-7% unit growth, and same-store sales of 3% to 4%, they can consistently grow the top line at 10% for some time to come. They still have operating-margin opportunities with centralizing the functions. The enterprise value is $2.2 billion. In the past 12 months, they did $343 million in Ebitda [earnings before interest, taxes, depreciation and amortization, a measure of cash flow], so it's 6.5 times Ebitda. For businesses with 15% earnings growth, that's very attractive. Double-digit earnings growth, with multiple expansion, is a powerful combination.

What else?

We are short
Fifth & Pacific
[FNP], the old Liz Claiborne. To their credit, they cleaned up a complicated company and boiled it down to three divisions: Juicy Couture, Lucky Brand, and Kate Spade. Frankly, I think they're a little tired, particularly Juicy, because the whole track-suit trend has run its course. The founders, the driving force of its success, have left the company and it is struggling. Lucky's growth has been slow. The darling is Kate Spade, capitalizing on accessories, a hot area in retail for the past year.

Geller's Picks

Company

Ticker

Recent Price

Chico's FAS

CHS

$15.09

Dover

DOV

53.57

Icon

ICLR

24.12

… and Pans

Fifth & Pacific

FNP

10.76

Ctrip.com

CTRP

12.50

Source: Thomson Reuters

But there's a flood of competition:
Michael Korskors -0.30864197530864196%Michael Kors Holdings Ltd.U.S.: NYSEUSD41.99
-0.13-0.30864197530864196%
/Date(1438376654512-0500)/
Volume (Delayed 15m)
:
4076779AFTER HOURSUSD42
0.010.023815194093831864%
Volume (Delayed 15m)
:
163607
P/E Ratio
9.787878787878787Market Cap
8352315321.50757
Dividend Yield
N/ARev. per Employee
394039More quote details and news »korsinYour ValueYour ChangeShort position
(KORS),
CoachCOH -0.3194888178913738%Coach Inc.U.S.: NYSEUSD31.2
-0.1-0.3194888178913738%
/Date(1438376505719-0500)/
Volume (Delayed 15m)
:
3929786AFTER HOURSUSD31.2
%
Volume (Delayed 15m)
:
218974
P/E Ratio
18.571428571428573Market Cap
8620154214.69649
Dividend Yield
4.326923076923077% Rev. per Employee
251379More quote details and news »COHinYour ValueYour ChangeShort position
(COH), all the department stores are increasing exposure to accessories. Coach's recent earnings showed the space is increasingly competitive. The market is being flooded with capacity. Fifth & Pacific recently gave guidance of $125 million to $140 million Ebitda for the year. The stock trades at over 10 times Ebitda and has a leveraged balance sheet. At the end of the second quarter, they had more than $300 million in net debt. Interest expense is sucking up the bulk of the operating income. On the flip side, Chico's has net cash and more financial flexibility.

It's a great way to play the U.S. manufacturing renaissance. Dover has about 17% of its sales in Europe and a similar amount from Asia and emerging markets. It is a true conglomerate. It has four main divisions. The largest is engineered systems, where they manufacture refrigerated display cases for commercial food service, specialty pumps, heat exchangers, auto lifts for the automotive market. Then, they have an energy division: They make diamond inserts for rig drill bits, pressure- pumping equipment used in harvesting energy. They have a business called communications technologies—microphone and acoustic-type products traditionally used in hearing aids but that are a good play on the growth in the cellphone market. They own Sound Solutions, which makes a lot of the microphones and speakers in handsets. Then they have a printing and identification business that makes bar coding and other equipment that the packaging industry uses to label products. The stock is trading at an all-time low valuation. Over the past 10 years, they've grown earnings at a 16% rate. Now, they will probably grow at GDP, plus a little bit. They've done a good job allocating capital—making strategic acquisitions, buying back stock, paying out dividends.

The diversity makes the business more stable. They've had only one down year in the past 10. That stability should result in a higher multiple. The stock yields 2.5% and trades at 7.2 times Ebitda. That number more normally should be closer to nine. We don't think earnings will go negative. They will grow at a slower rate, but will produce growth. And there's an opportunity for reasonable multiple expansion, which gives you a nice double-digit return, combined with a 2.5% yield.

How about a few more names?

Sure. I like
IconIClR -0.07420232500618353%Icon PLCU.S.: NasdaqUSD80.8
-0.06-0.07420232500618353%
/Date(1438376400244-0500)/
Volume (Delayed 15m)
:
687470AFTER HOURSUSD80.8522
0.05220.0646039603960396%
Volume (Delayed 15m)
:
11599
P/E Ratio
26.405228758169933Market Cap
4894945088.443
Dividend Yield
N/ARev. per Employee
146656More quote details and news »IClRinYour ValueYour ChangeShort position
(ICLR), an Ireland-based contract-research organization that runs clinical trials for drug and biotech companies, which have been outsourcing this skill set over the years. It's a global company and can credibly run global trials, allowing it to pick up share from smaller players. The market cap is $1.3 billion, and the enterprise value is $1.2 billion because they have net cash. They have financial flexibility. You'll see R&D spending pick up in big pharma and biotech. Icon is a direct beneficiary. You don't need to worry about government reimbursements. Recent bookings have been very strong. The book-to-bill ratio in the most recent quarter was 1.35, meaning the backlog is growing. They will get margin leverage as they cycle through that. Sales growth over the past 10 years is 20%, and EPS has been about 15% because of margin repression, but the strong book-to-bill ratio means margins will come back, giving the stock over $2 a share in earnings power. The stock is $23, and there is material upside.

On the short side, we have
Ctrip.comCTRP 1.2590182486914698%Ctrip.com International Ltd. ADRU.S.: NasdaqUSD71.58
0.891.2590182486914698%
/Date(1438376400272-0500)/
Volume (Delayed 15m)
:
2344228AFTER HOURSUSD71.6
0.020.02794076557697681%
Volume (Delayed 15m)
:
27988
P/E Ratio
N/AMarket Cap
10167210862.0027
Dividend Yield
N/ARev. per Employee
40501.5More quote details and news »CTRPinYour ValueYour ChangeShort position
(CTRP), the Chinese version of Expedia or Travelocity. There is a lot of pricing and margin pressure on customers and suppliers. While they've seen strong revenue growth, they've done a lot of couponing to drive the top line. Margins are under pressure. The company books the coupons as an expense.

We shorted it in January at $24. We are still short because earnings are continuing the downward trend. They announced a $500 million sales promotion that is triple what their net income was last year. It will cause them to operate at a loss. They also announced a $300 million share repurchase. They have $800 million in net cash, but they will burn through their cash to boost the bottom line. If that effort isn't successful, there's decent downside in the stock.